Credit union investments spike as liquidity grows
Volume Invested Through Southwest Corporate Nearly Doubled When Compared With The First Half of Previous Year
PLANO, TX--Credit unions—looking to put their excessive deposits to work—are placing their funds in Southwest Corporate Federal Credit Union’s investment instruments at a significantly higher rate this year than during the same time the previous two years. In the first six months of 2007, credit unions have invested more than $600 million in specially-structured share certificates. That amount nearly doubles the $321 million invested by credit unions during the same time period in 2006. The figure for the first half of 2005 was $228 million.
Through the first half of 2007, Southwest Corporate has created 28 specially structured certificates—on average, about one new certificate each week. But as popular as the structured share certificates are, “bullet” certificates are attracting even more interest. In just the first six months of 2007, credit unions have invested $2.9 billion in the “bullet” certificates offered by Southwest Corporate. That figure is more than a billion dollars higher than the first six months of 2006.
“Liquidity among credit unions has increased significantly in the first and second quarters of 2007,” said Zane Wilson, Director of Southwest Corporate Investment Services. “Share growth has outpaced loan growth more than usual in the first half—double the rate it was in the beginning of 2006. Additionally we have not seen as much of a reduction as usual in overnight cash the past few months stemming from the outflow of cash for taxes and regular summer spending.”
“But there’s more to it than that,” said Wilson. “Credit unions watching the Fed believe it is going to hold overnight rates right where they are for a while. This has spurred credit unions to invest additional funds for longer terms.”
Wilson also noted that loan growth within credit unions “is not meeting forecasts.” He added: “Consumers were not spending as much in the first half, and not borrowing as much. When credit unions have a pause in loans, the next step is investing the money effectively to meet their ROA goals.”
“Corporate certificates, whether structured or bullet, are an attractive option over agency security yields,” Wilson said. Many structured certificates are callable and offer a much higher rate than comparable agencies. However, bullet certificate rates at Southwest Corporate pay 10-25 basis points more than comparable bullet agency securities and have no call risk, enabling credit unions to lock in the high yields to maturity.
Since these investment instruments offered by Southwest Corporate generally pay 10 basis points to 25 basis points higher than comparable agencies, credit unions are collectively earning tens of thousands of dollars more by investing with Southwest Corporate, Wilson said. “Credit union investment managers are becoming wiser and more sophisticated in analyzing value among investment alternatives.”
(Southwest Corporate Federal Credit Union is a $13 billion Plano-based institution that serves the financial needs of more than 1,300 member credit unions.)